EnCore Oil and Gas

Investors scamper for small UK oil stocks amid heightening M&A talk - E&Y

LONDON (AFX) - Over 620 mln stg in new money was poured into oil and gas
companies listed on the UK's Alternative Investment Market in the nine months to
September, propelled largely by heightening merger and acquisition speculations,
said international accounting firm Ernst & Young.
The figure, which was nearly 50 pct ahead year-on-year, is still steadily
increasing over the past weeks, with E&Y predicting the full-year amount to
outstrip the 702 mln stg achieved in 2004.
"The third quarter is proving to be the golden quarter for AIM oil & gas
stocks this year," said Alec Carstairs, E&Y's oil and gas M&A partner.
"Market demand should continue until the end of the year. Despite the
fluctuations in the index, the AIM market as a whole is booming and this should
continue to feed through into oil & gas stocks," he added.
M&A was mainly behind the growth, allowing the sector to quickly recover
from the slump brought about by the collapse of Regal Petroleum PLC shares
during the summer.
Regal issued a string of profit warnings after a much-hyped well in Greece
turned out to be dry, leading to a cut in oil reserves, a larger-than-expected
losses in 2004, and the departure of chairman Frank Timis and other key
executives.
And to make the situation even worse, its employees in Greece went on
strike, disrupting the business for days, and the board found out that Timis
unilaterally decided to sell the group's key assets in Ukraine.
Sentiment reversed quickly however after a slew of takeover bids emerged,
the largest of which was the 2 bln usd approach by Russian oil giant LukOil for
Nelson Resources Ltd. Bid hopes also propped up shares of First Calgary
Petroleum and Dragon Oil PLC.
But E&Y, which tracks the top 20 oil and gas firms on AIM, believes the
growth is unsustainable as a number of companies are progressing high risk
exploration with little or no proven reserve base, "which means they may be less
attractive to major exploration and production companies".
"Couple this with the political and economic risk associated with the
countries of operation and their attractiveness declines further," Carstairs
said.
"As we go into 2006 we might start to see the performance (of these AIM
stocks) dipping," he said.